We maintain our NEUTRAL view on the sector. We project tourist arrivals of 27m in CY24, up 35% from 20m in CY23 and surpassing 26.1m in CY19 before the pandemic, backed by higher demand for both business and leisure air travel. The number is consistent with with Tourism Malaysia’s target of 27.3m. This will translate to a sustained recovery in passenger throughput at AIRPORT (MP; TP: RM9.00) and passengers carried at CAPITALA (MP; TP: RM0.78). For AIRPORT, the recently announced tariff revision is positive to earnings but may not be sufficient for it to fund more aggressive capex plans. Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift CAPITALA out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

Tourist arrivals underpin passenger throughput growth in CY24. We project tourist arrivals of 27m in CY24, up 35% from 20m in CY23 and surpassing 26.1m in CY19 before the pandemic, backed by higher demand for both business and leisure air travel. The number is consistent with Tourism Malaysia’s target of 27.3m. (see Exhibit 1). A key driver is Chinese tourists that historically contributed to about 12% of total tourist arrivals in Malaysia. Also helping, is a 30-day visa-free arrangement for Chinese and Indian visitors to Malaysia starting from Dec 2023 (while China grants inbound visitors from Malaysia 15 visa-free days between 1 Dec 2023 and 30 Nov 2024. These should drive growth in AIRPORT’S passenger throughput and CAPITALA’s passenger demand in CY24.

Further volume improvement for AIRPORT and CAPITALA in CY24. We project AIRPORT’s system-wide passenger throughput to rise by 7% to 131m in CY24. The group is optimistic that resurgence in passenger numbers and connectivity, expected to be driven by the introduction of new airlines and services at key airports, including Kuala Lumpur International Airport, Penang, Kota Kinabalu and Langkawi. Amplifying the positive outlook is the latest airlines’ seat capacity for 2024 showing an anticipated 13% increase over 2023, underpinned by the visa-free entry for Chinese and Indian passengers expected to boost for traffic recovery, particularly in the Northeast Asia Region. All in, it expect >90% international recovery expected in the 1HCY24, with local carriers expected to increase capacity further in 2024 via reinstating remaining grounded fleet and upgrade to 737-8 and 321 NEOs.

We see a similar trend for CAPITALA’s passenger demand in CY24, paving the way for its system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to re-activate 202 aircraft by end CY24 (presently 187 aircraft) available for operation and capacity to reach 83% of pre-COVID level. In addition to fleet re-activation, it expects further upside from the current high yield environment underpinned by the robust demand with forward bookings in February and March standing at 91% and 49%, respectively. It plans to launch more than 60 new routes across the group, expanding in China and India and start AirAsia Cambodia operations by the mid 2024.

PSC tariff revision, transfer PSC introduced. The Malaysian Aviation Commission (MAVCOM) recently announced the revisions to the Passenger Service Charges (PSC) for the First Regulatory Period (RP1), with effect from 1 June 2024 to 31 December 2026 (see Exhibit 3). Specifically, the PSC rates are for international travel i.e. ASEAN and beyond ASEAN. PSC have been standardised into a single international departure of RM73 per pax for KL International Airport (KLIA) Terminal 1, and RM50 per pax for KLIA Terminal 2 and other airports. MAVCOM is also introducing a transfer PSC for passengers transiting through a Malaysian airport. We are positive on this latest development which is expected to be earnings positive to AIRPORT but may not be sufficient for it to fund more aggressive capex plans.

CAPITALA’s regularisation plans to exit PN17 in the works. The group is in the final stages and on track to complete the regularisation plan by 4QCY24. It is on track to sign the sale and purchase agreement with AirAsia X by 2QCY24. To recap, part of its regularisation plan to lift it out of the PN17 status involves two major corporate exercise namely: (i) divesting its aviation group to AirAsia X in exchange of shares, and (ii) a proposed listing of a unit, which is the licensee of the AirAsia brand on NASDAQ via entering a letter of intent with Atherium Acquisition Corp (GMFI), a special purpose acquisition company. While we continue to like CAPITALA for being a beneficiary of the recovery in air travel as the pandemic comes to an end, we are mindful of it still being under the PN17 status. We do not have any pick for the sector.

Source: Kenanga Research - 3 Apr 2024